The cost of growth

Trailer homes owned by Canyon Falls Land Partners LP sit on a hill overlooking open fields of prairie on Cleveland Gibbs Road. The 1,240-acre Canyon Falls development is planned for the area between Argyle, Flower Mound and Northlake.

MUDs pave way for development but have consequences on cities

Residential developers flocked to Denton County between 2000 and 2010 in search of land where they could develop master-planned communities.

To finance their developments, the landowners began using municipal utility districts, or MUDs — a tool originally used to help small cities develop support services like water and sewer infrastructure.

With its own boundaries and the ability to set and collect taxes, a utility district is a government entity that works independently from a city or county, similar to the way most independent school districts work.

About 15 years ago, many regional leaders made deals with developers and consented to having districts form in their extraterritorial jurisdictions without much hesitation. Since 2000, the number of municipal utility districts in Denton County has more than doubled, jumping from 27 to 56, according to records obtained from the Texas Commission on Environmental Quality.

Now, some leaders are beginning to realize the consequences and have shown reluctance to allow the creation of more districts in the region.

Today, the boundaries of at least a dozen of these districts lie in east and northeast Denton County.

They form barriers in cities’ extraterritorial jurisdictions, or ETJ, which is land located just outside a city’s limits granted by the state to define areas for future economic growth and expansion.

But landowners and developers are wedging their districts in the ETJ of cities, claiming the land first and avoiding incorporation into cities and towns. The utility districts lack uniformity through the region, creating a patchwork effect much like an unfinished jigsaw puzzle. The districts leapfrog from one piece of land within one city’s ETJ to another before a city can naturally grow into the area.

“Landowners have the right to build and decide what they want to do with their land,” said Van Nichols, a county resident seeking to create his own district in Pilot Point’s ETJ.

Though the districts are beneficial in helping small communities meet growing demands for basic support services, some local officials worry that developers’ unsupervised use of utility districts will hinder the growth of local municipalities, according to Denton County Commissioner Hugh Coleman.

Lawmakers, local governments and residential developers try to create partnerships with each other to create win-win scenarios, but results vary — and history has shown that landowners tend to get their way.

“We’re entering the era of the districts,” said Dusty McAfee, planning manager for the town of Little Elm. “They were approved without much oversight, and we are forced to work with them.”

History of utility districts

The state began using utility districts in 1905 after lawmakers realized that small cities needed help meeting the demands for water and sewer systems. According to the TCEQ, 1959 is the earliest record of a utility district created in Denton County.

Texas has a bunch of various districts, which the state collectively refers to as special districts. And each type of district has its own purpose. Like a school district, a utility district has its own board members, district boundaries and tax rate.

The board-run government entities are created by the TCEQ, the Legislature or a county at a developer’s request, and they have the ability to incur debt and set and collect property taxes.

Developers use taxes collected in their districts to reimburse themselves for the cost of installing infrastructure.

The state’s water code permits the creation of utility districts within a municipality’s ETJ, where a city isn’t allowed to collect taxes.

“When the demands of a fast-growing municipality can’t be met by the expansion and provision of services by the city, then the special utility district becomes an option for which many urban areas have found some degree of success,” said Richard Greene, an adjunct professor at the University of Texas at Arlington and a former Arlington mayor.

Utility districts differ, but most have something to do with providing water services, and the term “water district” is used to establish a common identity.

“The original intent of these districts was to provide water and drainage service to rural residents and farmers,” McAfee said.

Under state law, creating a district involves four basic steps:

* First, a landowner submits a petition to request the creation of a district.

* Next, a state agency reviews the request to see if the need is justified.

* The state’s review is followed by either a county or city review for consent.

* And lastly, an election is held for residents in the district to determine whether the district may be formed.

Forming a new district

Nichols, the resident who owns an estimated 800 acres in Pilot Point’s ETJ, approached the Pilot Point City Council on Jan. 28, seeking consent to create a new district, Eland Farms, in the city’s ETJ.

Nichols, like most district developers, hopes to turn his land into a residential community.

Developers who use utility districts for their communities typically offer housing at cheaper prices, which forces other developers to seek out their own districts if they want to compete, Nichols said.

“It’s not my fault that the city already has three districts,” Nichols said. “I’m trying to do what’s best for me and my development, and I can’t compete any other way.”

Four Seasons Ranch, Talley Ranch and Smiley Road (formerly Shiney Hiney) are the three districts now in Pilot Point’s ETJ. Created between 2005 and 2007, all three sit undeveloped, in anticipation of the right economic conditions.

Developers are waiting until the expansion of the Dallas North Tollway and the commercial growth expected to follow before breaking ground, Pilot Point Mayor Greg Hollar said.

The three districts take up almost 6,000 acres, and officials are hesitant to allow another.

“We’re working closely with [Eland Farms] to avoid some of the issues we’ve faced in the past,” said Scott Ingalls, Pilot Point’s development services director.

Between 2005 and 2007, the community consented to giving away large portions of its ETJ to landowners and agreed to sign away their ability to voluntarily incorporate the utility districts until 15 years after the district is completed.

Without the ability to annex, or incorporate, the land, Pilot Point will have to wait on the sidelines, blocked from collecting any taxes until the districts are incorporated. That wait, Coleman said, could take longer than 15 years — maybe decades.

Between the three districts, about $500 million in debt has accumulated, according to the TCEQ. And according to the state comptroller’s office, utility districts throughout Denton County account for an additional $468 million in debt.

If a city incorporates a district, by state statute, it will also absorb any debt the district may have accumulated. Cities usually delay incorporation until debts are paid, which could take at least 30 years.

To avoid annexation, some districts opt to issue additional bonds once its initial bonds are paid, Coleman said. In other words, a district avoids annexation by continuing to issue more debt.

Landowners of utility districts usually don’t want to be annexed because they don’t want the city dictating what they can and cannot do, Nichols said.

“We own the land so we should be able to develop it how we want to,” he said. “There are more than 3,000 MUDs in Texas. They can work. They do work. I don’t think it’s right to criticize all of them based on the operations of some of them.”

Agreements between a city and a utility district can be arranged, but Coleman said the agreements are never guaranteed.

“You never know what the residents of a district will want or agree to,” he said. “They have the power to vote and petition just like anyone else. In some cases, they probably could vote against annexation.”

In rare cases, once established, residents of a district can vote to have it incorporated into a city — just as voters did in Providence Village, opting to create their own town.

“There’ll be big commercial strips that Pilot Point can’t collect taxes on, and do you think people will shop along the tollway or little old Pilot Point?” Coleman said. “The city will have huge developments in their ETJ and probably never see a dime.”

In eastern Denton County

The impact utility districts have on a municipality is more apparent in eastern Denton County than anywhere else in county and possibly in North Texas, based on records showing how many districts were created there in the last decade.

And, Coleman said, he’s afraid it will spread.

A city’s consent is needed before the state Legislature will approve a developer’s request for a district in the city’s ETJ.

However, if the city denies consent during its review, then a landowner can petition the city to extend its infrastructure at the city’s expense.

If, within 120 days, the city fails to provide the petitioned services, the applicant may petition TCEQ. If the agency agrees there’s a need for services, the city’s consent is presumed.

Simply put, a city can either work with a landowner and reach an agreement that benefits both parties, or the city can deny consent and allow TCEQ to grant the developer a district without any input from the city or county.

The difference between a legislative-approved district and one created by TCEQ is that the Legislature will grant a landowner authority to build roads, while TCEQ does not.

“Cities feel like developers have a gun to their heads and if they want any input, they have to enter a developer’s agreement,” Coleman said. “So basically, you have all these little cities that get trapped and unable to grow like they typically should because they have no choice.”

More developers are still eyeballing Denton County with plans to add more districts, which could stunt a city’s natural growth, and officials are, in most cases, powerless to stop them, Coleman said.

“The state approves so many districts that the only way to compete in this market is to have one yourself,” said Nichols, the landowner near Pilot Point.

When it comes to a city’s efforts to deny a district’s creation, size matters.

Larger cities such as Dallas and Fort Worth have been successful in holding off a district’s formation, unlike smaller cities, which have fewer resources. Tarrant and Dallas counties have 17 and 28 utility districts, respectively.

Land developers in Texas and some city leaders in favor of special districts argue that despite the flaws, the districts encourage population growth, stimulate local economies and meet growing demand for water utilities.

“Districts are abused by developers using loopholes to build their tract housing,” said McAfee, the Little Elm planning manager. “That’s fine for little rural cities in horse country, but they’re hurting our growth.”

Effects on city planning

As noted by local officials, the locations of these districts will continue to affect the development of cities in northeastern Denton County for years.

“Little Elm is surrounded by these things and their build-out is going to happen faster than they probably anticipate,” Coleman said.

Throughout the county, districts are stacked in the largely unincorporated ETJs of local municipalities, affecting the economic future of surrounding municipalities, city and county leaders say.

“They’re great for developers but a nightmare for city planners,” said Sara C. Bronin, a professor at the University of Connecticut School of Law and the author of a 2007 law review paper, Wrestling With MUDs to Pin Down the Truth About Special Districts.

In her article, Bronin discusses a district’s formation, power and abilities. She also analyzed how districts in Texas are granted too much power, which can work against a traditional government’s economy.

“And you can’t really blame the developer, but no one is looking out for the cities,” she said.

Utility districts can affect a city’s planning and economy in at least four ways:

* A district’s debt may convince a city’s leaders to delay the district’s annexing and expanding to avoid absorbing the district’s unpaid debts.

* A district can block a city’s natural growth, thus limiting its future tax base.

* The city may reach its capacity faster than anticipated.

* And a utility district’s growth can hurt central cities by luring tax revenues outside their bounds of tax collection.

In some ways, it’s hard for municipalities to keep a utility district from forming in its ETJ because of laws that tend to favor the developer, Bronin said.

These for-profit forms of government are allowed to incur debt and levy taxes, charge fees and set rules for its services, enter into contracts, obtain easements and condemn and annex property, she said.

“It’s dangerous because they are granted too much power. More power than what was intended,” Bronin said.

Several phone calls and e-mails to district developers and their attorneys in Denton County were not returned.

Legislative action

Local officials and lawmakers appear to realize that utility districts will continue to develop no matter what. Some state officials have filed legislative bills that, if approved, would allow more oversight and control of district growth rather than halt their development.

State Rep. Bill Callegari, R-Houston, filed a bill in November that seeks to amend the power of utility districts to increase transparency in meetings, and state Rep. Myra Crownover, R-Denton, filed House Bill 738 on Jan. 29 that would allow a county’s commissioners to address TCEQ before approving a district in a city’s ETJ.

“At least it will make developers approach us instead of bypassing us,” Coleman said. “But it’s never easy to get a bill passed. Passing a bill is harder than killing one.”

Supporters of Crownover’s bill say the bill will allow every stakeholder to address and possibly avoid any future conflicts.

Under the bill, any recommendations a county submits to TCEQ are not mandated, so they will be only suggestions for the state agency to consider, officials said.

“As Denton County grows, it is vital that we plan for that growth in an open, respectful and inclusive manner,” Crownover said.

Politically, granting local authorities more power to review landowners’ rights isn’t a popular idea, Bronin said. Despite all the criticism surrounding utility districts, they aren’t going away, she added.

“They’re being created without much accountability and it could take 10 to 15 years to turn this tide,” she said.

The ultimate defense for either approving or denying a district’s creation is the voter, said Greene, the UT-Arlington adjunct professor.

However, in some cases, according to county tax rolls, voters are planted in a district by developers to ensure that their districts are approved. Many districts have been approved by one to three votes by voters who live in mobile homes owned by the land developers.

MUD transparency

The operations of utility districts have been questioned by several state and local agencies. Texas Comptroller Susan Combs released a report calling for special districts to do a better job of providing transparency.

And even state officials have had a hard time collecting data.

“I will say — all the information we collected wasn’t easy to find,” said Tom Currah, who works for the Texas comptroller as the assistant director for research and analysis.

State officials for the Senate Research Center in a 2008 report referred to the special districts as invisible layers of governments.

The report stated that special districts are the most misunderstood form of government.

But in the report, lawmakers also argue that utility districts have many advantages, which include providing services that can be tailored to the needs of each district’s residents.

Consequences of growth

Officials say it’s fair to compare the recent growth of utility districts to the growth of gas drilling in the North Texas, which spiked around the same time.

City and county officials approved permits for drilling sites, wooed by the possibility of larger taxable values and economic growth. It wasn’t until the rigs were up and running that concerns arose.

“And that’s what’s happening now,” Coleman said. “Special districts have been around forever, but the difference now is how they are being used.”

So far, legislation set on amending a district’s granted powers and abilities has yet to be filed and probably won’t be any time soon. In the meantime, municipalities in Denton County will have to figure out how to manage the recent trend.

“It will take legislative action to change what’s happening,” Bronin said. “Right now, there’s an imbalance of power in favor of the developer.”

Bronin said she predicts the trend occurring in the eastern half of Denton County will spread to the western half.

During the Nov. 6 election, voters approved the creation of four districts — Belmont Fresh Water District I and II and Canyon Falls I and II, each a few miles north of Argyle.

Developers of each district plan to build billion-dollar housing projects. And more residential communities are in the works. Even the Hickory Creek area has a district pending.

But some regional planning experts agree that the housing developer doesn’t have to dictate the county’s growth.

A team of planning experts visited Pilot Point on Monday and told city leaders to be more aggressive when discussing agreements with a landowner seeking to create a utility district.

The eight-member team analyzed the city’s current comprehensive planning efforts and told city leaders to fight for agreements with landowners so both parties can benefit.

Agreements to split sales and property taxes and establish annexation agreements should be established in every case, they said. The experts also noted that a city can use its consent as a bargaining chip because of the difference between a legislative-approved district and one approved by TCEQ.

“The problem, at least from the standpoint of Pilot Point, is that while special utility districts can fund infrastructure, they also can create uneven taxation, uneven provision of services and poorly integrated infrastructure,” said Wayne Feiden, a planning consultant from Massachusetts. “As a result, if poorly planned, these districts can lead to quick but inefficient development, which in the long term costs taxpayers more and may lead the community to miss out on even higher-valued development options.”

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